Gary Stevens and Mary James are production managers in the Consumer Electronics Division of General Electronics Company, which has several dozen plants scattered in locations throughout the world. Mary manages the plant located in Des Moines, Iowa, while Gary manages the plant in El Segundo, California. Production managers are paid a salary and get an additional bonus equal to 5% of their base salary if the entire division meets or exceeds its target profits for the year. The bonus is determined in March after the company’s annual report has been prepared and issued to stockholders. Shortly after the beginning of the new year, Mary received a phone call from Gary that went like this: Gary: How’s it going, Mary? Mary: Fine, Gary. How’s it going with you? Gary: Great! I just got the preliminary profit figures for the division for last year and we are within $200,000 of making the year’s target profits. All we have to do is pull a few strings, and we’ll be over the top! Mary: What do you mean? Gary: Well, one thing that would be easy to change is your estimate of the percentage completion of your ending work in process inventories. Mary: I don’t know if I can do that, Gary. Those percentage completion figures are supplied by Tom Winthrop, my lead supervisor, who I have always trusted to provide us with good estimates. Besides, I have already sent the percentage completion figures to corporate headquarters. Gary: You can always tell them there was a mistake. Think about it, Mary. All of us managers are doing as much as we can to pull this bonus out of the hat. You may not want the bonus check, but the rest of us sure could use it. The final processing department in Mary’s production facility began the year with no work in process inventories. During the year, 210,000 units were transferred in from the prior processing department and 200,000 units were completed and sold. Costs transferred in from the prior department totaled $39,375,000. No materials are added in the final processing department. A total of $20,807,500 of conversion cost was incurred in the final processing department during the year. Required: 1. Tom Winthrop estimated that the units in ending inventory in the final processing department were 30% complete with respect to the conversion costs of the final processing department. If this estimate of the percentage completion is used, what would be the Cost of Goods Sold for the year? 2. Does Gary Stevens want the estimated percentage completion to be increased or decreased? Explain why. 3. What percentage completion would result in increasing reported net operating income by $200,000 over the net operating income that would be reported if the 30% figure were used? 4. Do you think Mary James should go along with the request to alter estimates of the percentage completion? Why or why not?
> Logistics Solutions provides order fulfillment services for dot-com merchants. The company maintains warehouses that stock items carried by its dot-com clients. When a client receives an order from a customer, the order is forwarded to Logistics Solution
> What is meant by the term break-even point?
> Magic Realm, Inc., has developed a new fantasy board game. The company sold 15,000 games last year at a selling price of $20 per game. Fixed costs associated with the game total $182,000 per year, and variable costs are $6 per game. Production of the gam
> Data for Hermann Corporation are shown below: Required: 1. The marketing manager argues that a $5,000 increase in the monthly advertising budget would increase monthly sales by $9,000. Should the advertising budget be increased? 2. Refer to the origina
> What is a segment of an organization? Give several examples of segments.
> Why are separate price and quantity variances computed?
> What are the four hierarchical levels of activity discussed in the chapter?
> How many Work in Process accounts are maintained in a company that uses process costing
> What are the three major elements of product costs in a manufacturing company?
> What is meant by the term operating leverage?
> Due to erratic sales of its sole product—a high-capacity battery for laptop computers—PEM, Inc., has been experiencing difficulty for some time. The company’s contribution format income statement for the most recent month is given below: Sales (19,500 u
> SkyChefs, Inc., prepares in-flight meals for a number of major airlines. One of the company’s products is grilled salmon in dill sauce with baby new potatoes and spring vegetables. During the most recent week, the company prepared 4,000 of these meals us
> Fill in the missing amounts in each of the eight case situations below. Each case is independent of the others. a. Assume that only one product is being sold in each of the four following case situations: b. Assume that more than one product is being s
> Last month when Holiday Creations, Inc., sold 50,000 units, total sales were $200,000, total variable expenses were $120,000, and fixed expenses were $65,000. Required: 1. What is the company’s contribution margin (CM) ratio? 2. Estimate the change in
> Distinguish between a cost center, a profit center, and an investment center.
> What is meant by the term management by exception?
> What are the major differences between financial and managerial accounting?
> In all respects, Company A and Company B are identical except that Company A’s costs are mostly variable, whereas Company B’s costs are mostly fixed. When sales increase, which company will tend to realize the greatest increase in profits? Explain.
> The Fashion Shoe Company operates a chain of women’s shoe shops around the country. The shops carry many styles of shoes that are all sold at the same price. Sales personnel in the shops are paid a substantial commission on each pair of
> Jaffre Enterprises distributes a single product whose selling price is $16 and whose variable expense is $11 per unit. The company’s fixed expense is $16,000 per month. Required: 1. Prepare a profit graph for the company up to a sales level of 4,000 uni
> Why is cost accumulation simpler in a process costing system than it is in a job-order costing system?
> From the standpoint of cost control, why is the FIFO method superior to the weighted-average method?
> Bandar Industries Berhad of Malaysia manufactures sporting equipment. One of the company’s products, a football helmet for the North American market, requires a special plastic. During the quarter ending June 30, the company manufactured 35,000 helmets,
> Why do departmental overhead rates sometimes result in inaccurate product costs?
> Distinguish between ideal and practical standards?
> Why is activity-based costing growing in popularity?
> What are the four steps in the planning and control cycle?
> Often the most direct route to a business decision is an incremental analysis. What is meant by an incremental analysis?
> On the cost reconciliation part of the production report, the weighted-average method treats all units transferred out in the same way. How does this differ from the FIFO method of handling units transferred out?
> Gold Star Rice, Ltd., of Thailand exports Thai rice throughout Asia. The company grows three varieties of rice—Fragrant, White, and Loonzain. (The currency in Thailand is the baht, which is denoted by B.) Budgeted sales by product and i
> Menlo Company distributes a single product. The company’s sales and expenses for last month follow: Required: 1. What is the monthly break-even point in units sold and in sales dollars? 2. Without resorting to computations, what is th
> Karlik Enterprises distributes a single product whose selling price is $24 and whose variable expense is $18 per unit. The company’s monthly fixed expense is $24,000. Required: 1. Prepare a cost-volume-profit graph for the company up to a sales level of
> In what ways are job-order and process costing similar?
> Martin Company manufactures a powerful cleaning solvent. The main ingredient in the solvent is a raw material called Echol. Information concerning the purchase and use of Echol follows: Purchase of Echol Echol is purchased in 15-gallon containers at a co
> What is meant by the term decentralization?
> What is a quantity standard? What is a price standard?
> Describe the three major activities of a manager.
> Under what conditions would it be appropriate to use a process costing system?
> What are the three common approaches for assigning overhead costs to products?
> What is meant by a product’s contribution margin ratio? How is this ratio useful in planning business operations?
> Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $20 per unit. Variable costs are $8 per unit, and fixed costs total $180,000 per year. Required: Answer the following independent questions: 1. What is the product’s CM rat
> Miller Company’s most recent contribution format income statement is shown below: Required: Prepare a new contribution format income statement under each of the following conditions (consider each case independently): 1. The number of
> Whirly Corporation’s most recent income statement is shown below: Required: Prepare a new contribution format income statement under each of the following conditions (consider each case independently): 1. The sales volume increases by
> The questions in this exercise are based on JetBlue Airways Corporation. To answer the questions, you will need to download JetBlue’s Form 10-K/A for the year ended December 31, 2004 at www.sec.gov/edgar/searchedgar/companysearch.html. Once at this websi
> A business executive once stated, “Depreciation is one of our biggest sources of cash.” Do you agree that depreciation is a source of cash? Explain.
> The questions in this exercise are based on Dell, Inc. To answer the questions, you will needto download Dell’s Form 10-K for the fiscal year ended January 28, 2005 by going to www.sec.gov/edgar/searchedgar/companysearch.html. Input CIK code 826083 and h
> Java Source, Inc. (JSI), is a processor and distributor of a variety of blends of coffee. The company buys coffee beans from around the world and roasts, blends, and packages them for resale. JSI offers a large variety of different coffees that it sells
> “A dollar of gross margin per briefcase? That’s ridiculous!” roared Art Dejans, president of CarryAll, Inc. “Why do we go on producing those standard briefcases when weâ€&
> Your team should visit and closely observe the operations at a fast-food restaurant. Required: Identify activities and costs at the restaurant that fall into each of the following categories: a. Unit-level activities and costs. b. Customer-level activit
> You often provide advice to Maria Graham, a client who is interested in diversifying her company. Maria is considering the purchase of a small manufacturing company that assembles and packages its many products by hand. She plans to automate the factory
> You and your friends go to a restaurant as a group. At the end of the meal, the issue arises of how the bill for the group should be shared. One alternative is to figure out the cost of what each individual consumed and divide up the bill accordingly. An
> “I think we goofed when we hired that new assistant controller,” said Ruth Scarpino, president of Provost Industries. “Just look at this report that he prepared for last month for the Finishing Department. I can’t make heads or tails out of it.” Finishin
> How does the computation of equivalent units under the FIFO method differ from the computation of equivalent units under the weighted-average method?
> How do the direct and the indirect methods differ in their approach to computing the net cash provided by operating activities?
> What are the three major sections on a statement of cash flows, and what are the general rules that determine the transactions that should be included in each section?
> Assume that a company repays a $300,000 loan from its bank and then later in the same year borrows $500,000. What amount(s) would appear on the statement of cash flows?
> Why aren’t transactions involving accounts payable considered to be financing activities?
> If an asset is sold at a gain, why is the gain deducted from net income when computing the net cash provided by operating activities under the indirect method?
> Why is interest paid on amounts borrowed from banks and other lenders considered to be an operating activity while the amounts borrowed are financing activities?
> What is the difference between net cash provided by operating activities and free cash flow?
> Would a sale of equipment for cash be considered a financing activity or an investing activity? Why?
> If the Accounts Receivable balance increases during a period, how will this increase be recognized using the indirect method of computing the net cash provided by operating activities?
> What is the purpose of a statement of cash flows?
> What is the danger in allocating common fixed costs among product lines or other segments of an organization?
> Prentice Company is considering dropping one of its product lines. What costs of the product line would be relevant to this decision? Irrelevant?
> What are cash equivalents, and why are they included with cash on a statement of cash flows?
> “All future costs are relevant in decision making.” Do you agree? Why?
> “Sunk costs are easy to spot—they’re simply the fixed costs associated with a decision.” Do you agree? Explain.
> Are variable costs always relevant costs? Explain.
> How will relating product contribution margins to the amount of the constrained resource they consume help a company maximize its profits?
> What is a relevant cost?
> How can budgeting assist a company in planning its workforce staffing levels?
> “As a practical matter, planning and control mean exactly the same thing.” Do you agree? Explain.
> What is the contribution margin?
> What is the difference between ordinary least-squares regression analysis and multiple regression analysis?
> What happens to overhead rates based on direct labor when automated equipment replaces direct labor?
> “If a product line is generating a loss, then it should be discontinued.” Do you agree? Explain.
> Provide two reasons why overhead might be underapplied in a given year.
> What is the major disadvantage of the high-low method?
> What adjustment is made for underapplied overhead on the schedule of cost of goods sold? What adjustment is made for overapplied overhead?
> What is meant by the term least-squares regression?
> Give the general formula for a mixed cost. Which term represents the variable cost? The fixed cost?
> What account is credited when overhead cost is applied to Work in Process? Would you expect the amount applied for a period to equal the actual overhead costs of the period? Why or why not?
> Does the concept of the relevant range apply to fixed costs? Explain.
> If fixed manufacturing overhead costs are released from inventory under absorption costing, what does this tell you about the level of production in relation to the level of sales?
> If the units produced and unit sales are equal, which method would you expect to show the higher net operating income, variable costing or absorption costing? Why?
> Managers often assume a strictly linear relationship between cost and volume. How can this practice be defended in light of the fact that many costs are curvilinear?
> Why is the sales forecast the starting point in budgeting?
> “Variable costs and differential costs mean the same thing.” Do you agree? Explain.
> What is meant by an activity base when dealing with variable costs? Give several examples of activity bases.
> Are selling and administrative expenses treated as product costs or as period costs under variable costing?
> When would job-order costing be used instead of process costing?
> Why aren’t actual manufacturing overhead costs traced to jobs just as direct materials and direct labor costs are traced to jobs?
> The questions in this exercise are based on Netflix, Inc. To answer the questions you will need to download the Netflix Form 10-K for the year ended December 31, 2005, at www.sec.gov/edgar/searchedgar/companysearch.html. Once at this website, input CIK c
> The questions in this exercise give you an appreciation for the complexity of budgeting in a large multinational corporation. To answer the questions, you will need to download the Procter & Gamble (P&G) 2005 Annual Report at www.pg.com/investors/annualr
> The questions in this exercise are based on Toll Brothers, Inc., one of the largest home builders in the United States. To answer the questions, you will need to download Toll Brothers’ 2004 annual report (www.tollbrothers.com/homesearch/servlet/HomeSear
> You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at cer
> Haglund Department Store is located in the downtown area of a small city. While the store had been profitable for many years, it is facing increasing competition from large national chains that have set up stores on the outskirts of the city. Recently th
> Understanding the nature of fixed and variable costs is extremely important to managers. This knowledgeis used in planning, making strategic and tactical decisions, evaluating performance, and controllingoperations. Required: Form a team consisting of f
> Define the following terms: incremental cost, opportunity cost, and sunk cost.
